Economics: Of Forecasts and Flimflam

Get out your crystal ball, was the directive from the editor, and tell our readers what lies in store in the new year.

Alas, your columnist (a) has no crystal ball and (b) is wary of the prophecies from those who do have one. He is alert, too, to the shortcomings of forecasts generated by sophisticated econometric forecasting models.

The best work of the most far-seeing forecaster is subject to host of unforeseeable influences, from terrorist bombings to the weather.

This time year ago, according to the Institute of Economic Research’s “Consensus Forecasts”, GDP growth in the year to March 2002 would be three percent. This figure was the mean forecast from 12 organisations whose assessments of GDP growth ranged from 2.4 to 3.2 percent.

At that time, there were just three months of the March year to go. Thus the forecasters were exercising their “short-term” vision. GDP for the year eventually was recorded at 3.3 percent.

Economists can’t resist brandishing the decimal point, presumably to persuade us they can forecast with remarkable precision. If they had said the economy would have grown “by about three percent”, who could quibble?

As to their longer-term vision, this time year ago the mean GDP growth forecast for the year to March 2003 was two percent (the forecasts ranged from 1.3 to 2.5 percent). This meant they expected significant slowdown in growth from 2001/02.

Just nine months later, however, the economists were hoisting their expectations. GDP growth now looked likely to be robust 3.4 percent (the forecasts ranged from 2.9 to 3.9 percent).

The point of this preamble, as your columnist obliges his editor and consults the “consensus” oracle, is to caution readers that the most professionally prepared prophecies can soon be reduced to flimflam.

At deadline time, the latest available mean forecast was for GDP growth of 2.7 percent in 2002/03, ranging from 2.4 to 3.5 percent. It was prepared and published in late September, after six months of stronger economic growth than economists had been expecting. High inflows of migrants were factor – the net inflow of migrants in the year to September was 37,000, the equivalent of city the size of Wanganui.

Stronger wage growth and the migrant inflow helped lift consumer spending and housing investment, and nothing suggested New Zealanders would slow their spending. Thus private consumption was forecast to grow by around four percent in 2002/03, easing to nearer 2.5 percent next year. The easing was accompanied by expectations of lower employment growth – from around two percent in 2002/03 to 1.5 percent in the following 12 months.

Wage growth, tempered by the migrant flood will be 2.5 percent this March year and pick up to around three percent next year, say the forecasters.

Export growth of around five percent in 2002/03 will ease to 4.5 percent in the following year, but there is disconcertingly broad range of views, from 2.7 to six percent. Imports are forecast to grow much more strongly than exports in 2002/03 (by around 6.5 percent), and then ease in the following 12 months to 4.5-5 percent.

The annual inflation rate is reckoned to run at around 2.6 percent in the 2003 March quarter, slipping to two percent next year, while the exchange rate’s direction will be onwards and upwards – the TWI is expected to average 54.5 in 2002/03, rising to 56.1 the following year. Interest rates are forecast to increase slightly from 5.9 percent this March year to 6.1 percent in 2003/04.

A gush of economic data since publication of those forecasts gave no cause for second thoughts about the pace of GDP growth. Measures of business activity in the Institute’s September quarter business confidence survey suggested GDP would be much higher in the second half of 2002/03, compared with the same period year earlier. High capacity utilisation and difficulties in finding labour loom as the main constraints to expanding output.

As to price pressures, big falls in prices for our commodities on world markets in the last year generated deflationary environment in the export sector, import prices fell as the exchange rate appreciated, productivity increased. The inflationary beast was kept in its cage.

Ah, but can the current pace of economic expansion be maintained through 2003? The domestic economy is humming along nicely, thank you, but the story overseas is ominously different. IMF chiefs are confident global recovery is under way, but it is likely to be weaker than anticipated few months ago thanks to the sell-off in global equity markets, softer-than-expected indicators of real activity, and further market turmoil in parts of Latin America.

The slow world recovery should be taken into account, as your columnist wishes you happy Christmas and prosperous new year. Prosperity might stem more from public-private partnerships of the sort causing such fuss in mid-October, and with government plans to press on with infrastructural developments, than with an export push.

Bob Edlin is Management magazine’s regular economics writer.

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